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On April 21, 2022, the German Federal Ministry of Finance (BMF) published its long-awaited circular regarding the repayment of capital by non-European companies. In response to ongoing case law of the German Federal Fiscal Court, the BMF addresses the tax treatment of redemptions of share capital and returns from unpaid capital contributions to share capital (e.g. share premium) by non- European Union and specifies that these payments can be made in a tax-neutral way.
The circular concerns all German taxpayers who hold a stake in a non-EU company receiving return of share capital or other distributions from it. We have therefore summarized some aspects below.
- A tax-neutral repayment of share capital is possible. The requirements of art. 7 para. 2 KapErhStG must be taken into account.
- A tax-neutral return on contributed equity other than share capital is possible provided that the so-called order of use is taken into account. The basis for calculating the capital repayment is the foreign income statement.
- Due to the high evidentiary requirements, it remains to be seen whether the circular will bring the hoped-for ease.
The German Federal Tax Court (BFH) has already confirmed in numerous rulings that companies domiciled in non-European countries can also return share capital and other capital contributions to their shareholders in a tax-neutral manner. Until now, the tax authorities did not apply these decisions and therefore also qualified a return of capital by non-European companies as a taxable dividend.
With the circular of April 21, 2022, the tax authorities accept the established case law of the German Federal Financial Court for all cases still open and clarify how and under what circumstances a return of capital is tax-neutral and which documents and evidence are mandatory.
The Federal Ministry of Finance defines non-EU companies as entities which are not subject to unlimited tax liability in Germany, an EU member state or an EEA state, but in another state at the time repayment of capital. This includes in particular companies which are subject to unlimited tax liability in the United States, the United Kingdom or the Channel Islands. Provided that the EEA companies have not filed a request for return of capital pursuant to Sec. 27 par. 8 KStG, the principles of the circular also apply to companies in the EEA. Therefore, despite the Circular, a request for return of capital pursuant to Sec. 27 par. 8 KStG still needs to be filed for EU companies.
In the event of redemption of share capital, Sec. 7 para. 2 KapErhStG must be taken into account. This applies to cases where the share capital has been created by the conversion of company funds. As proof, the BMF requires in particular the resolution on the reduction and reimbursement of the share capital. In practice, it is also advisable to keep the capital increase resolutions on file as well as the corresponding bank account statements for payment and reimbursement.
The return on other contributed equity may also be tax neutral. However, the so-called order of use must be taken into account. Therefore, non-EU corporate profits are considered distributed first and therefore lead to taxable dividend income at the shareholder level. Only to the extent that the distributions exceed a distributable profit should the distribution be recognized as a tax-neutral return of capital. The basis for calculating the amount of capital repayment is the foreign profit and loss account preceding the year of payment. A reconciliation of the foreign income statement with German tax law is not required. As documents and evidence, the BMF requires, in particular, proof of the unlimited liability to tax of the paying company as well as its foreign balance sheet and profit and loss account, the percentage of German shareholders’ ownership and the resolutions and evidence (bank account statements) of the distribution made. In addition, resolutions and evidence of capital contributions not made to the share capital must also be kept.
Payments already made by non-EU companies should be reviewed based on the principles of the published circular. Future distributions should be planned based on the order of use and the required documentation should be carefully kept on file to ensure the tax neutrality of the distribution.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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